I have been asked numerous times whether congress will vote to extend the home buyers credit.  It is situations like this that help to make the point that the more people try to game the system, the more difficult the IRS is to deal with.

Government investigators revealed today that fraud is rampant in the First-Time Homebuyer Tax Credit program. Over 100,000 taxpayers have tried to cheat the system, the IRS says. Some of filers for the credit were just four years old.

The program allows people who haven’t bought a home in the past three years to claim up to an $8,000 tax credit, based on the home purchase price and their income level. It is credited with helping lift the housing market, and Realtors and other real estate industry groups are lobbying for its expansion and extension.

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There are plenty of taxation philosopher who decry the use of tax credits/deductions to regulate the economy:

The objective of most sound tax policy is for the tax code to interfere with household and business decisions as little as possible—that is, to let decisions be made on economic fundamentals, not based on their tax treatment. Housing tax subsidies have violated this tenet of sound tax policy and distorted household decisions in several important ways. First, they encourage investment in housing over investment elsewhere in the economy, namely business investment. Secondly—and this is something that should be appreciated more right now—the deductions for mortgage interest and real estate taxes paid grow with the size of the house and the mortgage, encouraging the financing of oversized houses with oversized loans. It would go too far to blame the current housing crisis on the existing tax subsidies, but they certainly haven’t helped matters.

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It is too late and too political to remove overly complicated politically motivated creaziness from the tax code, but perhaps a little awareness can help.

The IRS to the rescue!  Yes, the IRS has published a website, the  IRS Retirement Plans Navigator, which takes all the retirement plan choices and presents them in various comparison formats that make it easy to … well … navigate the complicated world of retirements plans

As I go around the city, talking to my fellow Pittsburgh Small Business Owners, I am surprised by how few take full advantage of the tax benefits the emanate from Retirement plans.

As an employer, you can set aside a portion of your profits for later instead of giving them to Uncle Sam.

However, the plans can be complicated and choosing the right plan is a bit of a minefield.  (It can be pretty expensive to change your mind later!)  When getting advice from a Financial Adviser, make sure that your trust level is high — many times you might receive a recommendation that serves the best interests of  a plan administrator and not necessarily the business owner and the employees interests.

This simple, innocuous tool is going to help many us save some serious money!

Taxes are meant to raise revenue, not micromanage a complex economy. Tax policy should not add unnecessary and discriminatory market distortions. In general, political efforts to manipulate the economy make markets less efficient by influencing consumers, retailers, and manufacturers to consume, sell, and produce more or less of a product than they otherwise would. While the economic costs of these distortions may be difficult to measure, they are real and economically damaging.

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Low inflation has made food and gas more affordable during the recession, but there’s a downside: Social Security beneficiaries probably won’t get a raise next year, and the IRS may reduce the amount workers can contribute to their 401(k) plans.

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A simple quiz for smart marketers:

Let’s say your goal is to reduce gasoline consumption.

And let’s say there are only two kinds of cars in the world. Half of them are Suburbans that get 10 miles to the gallon and half are Priuses that get 50.

If we assume that all the cars drive the same number of miles, which would be a better investment:

* Get new tires for all the Suburbans and increase their mileage a bit to 13 miles per gallon.
* Replace all the Priuses and rewire them to get 100 miles per gallon (doubling their average!)

Trick question aside, the answer is the first one. (In fact, it’s more than twice as good a move).

We’re not wired for arithmetic. It confuses us, stresses us out and more often than not, is used to deceive. [PS here are some reader-contributed explanations for those still lost: Charlie, and Nariman.]

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The White House announced Thursday that Pittsburgh will host the next G-20 summit on Sept. 24 and 25, a spokesman confirmed.

Press secretary Robert Gibbs made the announcement during a press briefing at the White House.

“Hosting a global economic summit will allow the world to see that Pittsburgh is a great, progressive city with a distinguished history and a limitless future. We’ve recognized the region’s appeal for years and are thrilled that others will have the same opportunity,” said Chuck Ardo, spokesman for Gov. Ed Rendell.

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With so many invoicing web apps available choosing one can be a daunting task. Even limiting your options to the most popular services doesn’t help that much, as the costs of the various plans vary so little.

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Many people are upset that the mileage rate (from the IRS) has decreased. The mileage rate decreased because fuel costs have decreased.

(All of you conspiracy theorists might want to note that the same thing happened last year at this time too. Hmmm, just in time for us to drive around and do Christmas Shopping……)

When I talk to a Small Business Owner, I hear disappointment that the IRS mileage rates dropped. When I talked to an accountant friend of mine, she was happy – “I’d rather pay less for gas than have a higher deduction.”

Better spending habits are far, far more valuable for tax savings than spending more and getting more “write-offs”.

IRS Announces 2009 Standard Mileage Rates

IR-2008-131, Nov. 24, 2008

WASHINGTON — The Internal Revenue Service today issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

*
55 cents per mile for business miles driven
*
24 cents per mile driven for medical or moving purposes
*
14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2008-72 contains additional information on these standard mileage rates.

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In my experience with Small Business Owners, I have seen some pretty messy finances. And many times a Small Business Owner will tell me “Oh, no…you haven’t seen anything this bad.”

It always reminds me of this scene from Blade Runner (sans the “time to die” part):

Two early mistakes, she said, were an accounting system that wasn’t equal to the mazes of welfare billing and failure to consult with a lawyer. “You need it in writing,” she says with a smile.

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People have been asking me about the “Financial Crisis” recently. What I have found is that Good Business Ownership trumps tough economic conditions. Business Owners who were struggling before are struggling now. Business Owners that were making money before are making money now.

A Small Business Owners investments are largely on Main Street, not Wall Street.

Another dynamic to which Small Business Owners should be sensitive is that the bulk of their investments are in their business.

The good news with this is that uncertainty about a Small Business’ financial condition can be easily removed with a good monthly accounting service. A Small Business Owner may worry about their IRA’s or brokerage accounts, but the when it comes the business, we should all know exactly where we stand.

We can remove uncertainty about our main investment.

Some good great sources for a broader understanding of the “Financial Crisis”

Great, Great stuff on this over at This American Life here and here.

It would be impossible to overstate how great these reports are. You will be informed and satiated by listening to these.

These are long, but quite engaging and easy to follow. Once you listen to these you will have a better understanding of the situation beyond that of most financial services consultants.

For a shorter explanation, check this 8 minute video out.

Note: These are all NPR sources, but are free from political commentary. These are fair, accurate and thorough reports.

Recently Beth posted the following question on the FAQ’s page:

Hi Jim,

I have belonged to a bartering organization for some time. The fees are being raised, and since my business is growing, I am rethinking my need for a bartering group. Jim, can you tell me the pros and cons on taxes for bartering? I always receive a 1099 from the bartering broker, usually between 1,000 and 6,0000 per year. Should I have this barter income come as my business, or my personal income (I have used bartering for personal use and business needs) and I am not sure how this affect my taxable income.

thanks

Beth Caldwell
Pittsburgh Professional Women

Great question Beth! As cash gets tighter, barter activity tends to increase.

The short Answer:

It’s not worth the trouble.

The Long Answer:

Let’s start off by reviewing barter exchanges by taking a look at a short note about this in the September “Small Biz Builder”:

Barter Exchange Defined

“Transactions involving the exchange of property or services instead of cash are called barter exchanges. The fair market value (FMV) of the property or services received in an exchange is taxable income to the recipient.

For example, an auto mechanic repairs a landlord’s car in return for 6 months rent-free use of an apartment. The landlord reports the FMV of the auto repair as rental income and the mechanic reports the fair market rental value of the apartment as self-employment income.

Caution: due to increased bartering activity via the Internet, the IRS has recently signaled its intent to pursue tracking barter exchanges.”

Now for my opinion:

I have never seen any increase in tax efficiency that results from Barter Exchanges. (But tax efficiency isn’t everything, as we will see in later paragraphs.) In fact, bartering may result in a greater likelihood that your accounting may be considered inaccurate by the taxing agencies!

(After all, the IRS has “recently signaled its intent to pursue tracking barter exchanges”. This is because taxing agencies don’t believe that barter income and expense are receiving the proper treatment)

In most cases, we have found that trading goods and services for other goods and services is less efficient than trading trading dollars for goods and services. And this is not only due to the complexity inherent in reporting bartering, but also due to the service fees charged by barter systems.

When Bartering might make sense:

There is, however, a case where barter might make sense: If a Business Owner has extra “stuff” that wouldn’t get used otherwise, offering this “stuff” as payment for a needed service would be a way to increase the business’ financial efficiency.

Here are (2) examples:

Example 1: A hotel that has capacity during a slow time. They have all cost for those rooms even if the room were never reserved. But they can offer the rooms, something they were paying for anyway, as an exchange for another good or service.

Example 2: A caterer has 10 gallons of milk that need to be used in the next (2) days. The caterer can offer to provide some food to a Chamber of Commerce in return for free admision to future events. The caterer saved the loss of their inventory, and also got something in return that the caterer was going to use anyway (Admission to the chamber events).

Your Tax Situation:

As far as what to do with your taxes, we would need to apply the appropriate proportion of income/expense to both business and personal tax returns. I know it’s kind of a pain, but the best thing to do would be to pull out your monthly barter statements for the year, and start adding up the business transactions and adding up the personal transactions. Oh, and by the way, this is an example of the increased complexity that results from bartering transactions.

The business income/expense gets reported on the business return and the personal income/expense would get reported on your personal return. If you want a more technical answer, email me directly and I will go into it with you.

(And if I could make an unrelated observation, your financial life, beyond dealing with barter exchanges, would be better if you didn’t intermingle business and personal transactions!)

For you Beth, largely because you offer a service, I would recommend trading those little green rectangles of paper that we call money for the goods and services that you need.

This is from a Padgett press release:

Accounting Today has named Padgett President Roger Harris to
its “2008 Top 100 Most Influential People in Accounting”
list.

This year’s list, entitled “New Frontiers”,
focuses on the abounding changes in the accounting industry and
details how the individuals featured in the Top 100 are impacting and
advancing the field. The list includes not only accounting
professionals but also government officials and regulators.

“The profession stands poised to cross the
threshold into largely unexplored territories, such as the inevitable
convergence of U.S. GAAP and International Financial Reporting
Standards, new technologies, a potential revamp of the Tax Code and
dizzying changes in workforce demographics,” said Accounting
Today editor Bill Carlino. “This year’s Top 100 People roster
includes many of those who are spearheading the profession’s
journey into these brave new worlds.”

Padgett Business Services
is at the forefront of this journey, educating policy-makers and
shaping legislation in Washington. Through the efforts of the
Padgett Foundation, Padgett Business Services
is actively participating to ensure that new regulations enhance the
accounting profession; Harris recently testified on behalf of Padgett
in the IRS hearings on one of the most pressing issues in the
accounting industry today – preparer penalty rules.

However, the primary focus of Padgett’s work
in Washington is to shape legislation so that it benefits America’s
small business owners. Acting on behalf of Padgett’s small
business clients throughout North America and associations of tax
practitioners, Harris has testified several times on IRS reform and
has testified before the Senate Small Business Committee and the
House Ways and Means Committee. He has also been featured as an
expert panelist on Tax Talk Today, the IRS monthly web-cast.

Accounting Today describes Harris as “a veteran tax policy
advisor to the IRS and Congress, his influence and insight are
welcomed in Washington as well as on Main Street.”

This is not the first time that Padgett Business Services
has appeared on the “Top 100 Most Influential People in Accounting”
list; Vice Chairman Dan Sautner has also been honored on the list and
Accounting Today has recognized Padgett in the past with the
following citations: Top 100 Firms, Top 10 Fastest Growing Firms in
America (without merger for growth), Merit Award for Achievement in
Client Service, Gold Medal Award for Achievement in Client Service.

Not only is Padgett recognized as a
leader in the accounting industry, but they are also recognized as a
leading international franchisor. Padgett has been ranked as a top
franchise by Entrepreneur, Success, and Income
Opportunities magazines, and was also ranked in Franchise
Business Review’s Franchise 50 2008 Franchisee Satisfaction
Awards.

Great article from the IRS site on “Independent Contractor vs. Employee”. This is always a difficult issue for Business Owners and many times the determination is skewed by an emotional Business Owner who desperately wants to avoid payroll taxes.

The IRS doesn’t have a clear set of yes/no questions for this. No flow chart or decision tree. But, for a cool head, usually there isn’t much question about worker classification. If you are unsure, best bet is to classify the worker as an employee. Call the office if you have any questions.

IRS Summertime Tax Tip 2008-24

Are your workers independent contractors or employees? The answer can have a profound impact on how much tax you pay as a small business owner. Knowing whether your workers are or are not employees will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

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When you have a “bad fit” with a client, raising fees can resolve the situation.

Sometimes, the client is insensitive to the compatibility issues with the provider. In this case, raising fees can initiate some dialogue with the client regarding the level of compatibility. From this dialogue, some corrective advice can be communicated gently and openly with out generating a defensive posture from the client. If anything, the client will expect you to be defend your new, higher fee. As long as you don’t get defensive (something that is within your control) a productive conversation can ensue.

In the case where the client is equally frustrated, it will serve to emphasize the “poor fit” between your service and their needs. There are many elements that comprise a “good match” and price is a fundamental ingredient. Raising your fees might just be what the clients needs to initiate a separation.

Lastly, price is also a fundamental ingredient in your evaluation of the client fit. Raising your fee might actually be what helps you decide the client is no longer a bad match. Like I tell my operations coordinator “Yeah, working with them sure is difficult, but at least now we can maintain our margin.” Knowing that you are making money makes everything OK.

So how can you lose?

Huh?

This paper reexamines the responsiveness of taxable income to changes in in marginal tax rates using detailed compensation data on several thousand corporate executives from 1991 to 1995. The data confirm that the higher marginal rates of 1993 led to a significant decline in taxable income. This small group of executives can account for as much as 20% of the aggregate change in wage and salary income for the 1 million richest taxpayers and one person alone can account for over 2%. But the decline is almost entirely a short-run shift in the timing of compensation rather than a permanent reduction in taxable income. The short-run elasticity of taxable income with respect to the net of tax share exceeds one but the elasticity after one year is at most 0.4 and probably close to 0. The response comes almost entirely from a large increase in the exercise of stock options in the year before the tax change, followed by a decline in the year of the tax change and the change is concentrated among executives at the top of the income distribution. Executives without stock options are 6 times less responsive to taxation. Other types of compensation such as salary and bonus or nontaxed income are either not responsive to tax rates or not large enough to make a difference. The estimated elasticities show that the dead weight loss of recent tax increases was around 15-25 percent of the revenue generated.

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This article says it all. But, I think it is funny (and Embarrassing for Congress) that Congress is blaming the IRS. The IRS has no choice but to enforce the laws that Congress passes. I don’t think that there is a person in the IRS that actually thinks the antiquated regulations regarding the cell phone deductions are appropriate. But what are they going to do? Just ignore the law?

If Congress would change the law, then “IRS Weenies” (see the last paragraph of the quoted article) would be enforcing the appropriate laws instead of being saddled with an unwieldy tax code.

I just kills me how Congress likes to blame the IRS. If Congress passed and update laws as appropriate, then these issues wouldn’t occur. I think that such out-in-out pandering and posturing makes Texas Representative Sam Johnson the “Weenie”.

When I explain this Regulation (or any of the many other inappropriate regulations) to my clients, I place the blame where it belongs: on Congress, not the IRS

Bet you didn’t even know: If you use a cell phone for work (one provided by your company), you’re supposed to keep a detailed log of every call you make on that phone, recording whether each call is for work or for personal use. If you don’t, and even if 100 percent of the calls are for work purposes, your employer, by law, can’t consider your phone a business expense. Instead, it has to consider the phone a perk provided by the company, which means its value has to be treated as taxable income to you.

If this sounds crazy it’s because virtually no one follows the letter of the law on this issue. (If anyone out there has a work-provided cell phone and has the value of its service tacked on to their W-2 at the end of the year, let me know.) But it is the law, and it’s basically remained unchanged since cell phone service began as an outrageous luxury for the rich in 1989.

While most employers have simply been ignoring the law—the same way that no one itemizes and pays taxes on out-of-state purchases—the IRS has of late been cracking down on the issue. According to the L.A. Times, UCLA got slapped with a $239,000 bill for back taxes because employees hadn’t been keeping the aforementioned logs. UC San Diego received a similar, $186,000 bill. The University of California system provides some 13,000 workers with University-issued cell phones, so its potential liability is huge. Nationally, 5.5 million people have phones provided by their employers, which must have IRS agents’ eyes lighting up with giant dollar signs like Scrooge McDuck.

The good news? Our Congressmen are trying to ride to the rescue to change the law that requires the absurd recordkeeping. Both the House and Senate have pending legislation to take cell phones off the list of taxable fringe benefits, and even the IRS’ Advisory Committee now considers the rules to be overly “burdensome for any employer” and recommended relaxing the requirements.

See more details from the Times at the link below, including this gem of a quote from Texas Representative Sam Johnson: “In 1989 when cellphones were huge and when it cost a lot of money to make a phone call. Nowadays they’re a dime a dozen and the cost is way down. If you don’t log all your telephone calls, you’re going to have some IRS weenie after you. That’s why we’re trying to get the law changed—because it just doesn’t make any sense anymore.”

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Computers are great for many things. While I am not a big fan of fully featured, complete accounting packages like Quickbooks or Peachtree (very rarely do I meet a Business Owner who actually uses more than the check writing or invoicing modules), I am a fan of a good online invoicing applications.

I usually recommend Freshbooks to my clients, but the new Curdbee looks to be worth checking out — Especially because it is free!

This application seems to be directed mostly at those incvoice via paypal or google checkout, but a user can still print out mail an invoice.

I’m keeping my eye on this one.

In March, agents served the orig­inal summons, calling Wesson to testify and produce certain books, records, papers and data account­ing for his taxes dating back to 2003. Instead, Wesson demanded a cer­tified copy of an IRS agent’s oath and a copy of the agent’s photo ID, according to court documents.

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Small Business Owners across the land are tightening their belts due to our challenging economy. But one thing that we forget sometimes is the IRS is also doing business in the same economy.

“In an era of growing federal deficits and amidst reports of an increasingly gloomy fiscal outlook, the federal government cannot afford to allow businesses to continue to accumulate unpaid payroll tax debt with little consequence,” Sebastian said.

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Congress is on the verge of requiring payment card processors to tell the Internal Revenue Service how much money merchants receive through credit card and debit card transactions.

…

“This proposal does not raise taxes on anyone,” said Baucus, who chairs the Senate Finance Committee. “These information reports would just cause people to file more accurate returns.”

…

The legislation, however, would require credit card processors to withhold taxes on payments to a merchant whose taxpayer identification number (TIN) couldn’t be verified. But there are bound to be errors in the TIN verification process, Darien said, meaning some small businesses could have 28 percent of their credit card reimbursements withheld until the errors are corrected.

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The vast minority of Small Business Owners actually do this. I’m as guilty as anyone for not crafting a message about how “remarkably unique” my business is.

With a message that communicates how remarkably unique your business is, targeted at a narrowly defined ideal prospect, price pressure goes out the window. Find you message, raise your prices and grow through increased average dollar per sale.

I use an hourglass image to illustrate the idea that every customer that comes into your funnel and squeezes through that small part to become a customer needs to immediately go into another expanded set of offerings (the bottom widening part of the hourglass) that includes complimentary products or services, introductions to strategic alliances and an acute focus on referral generation – that’s how you build real growth momentum.

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